Budget 2023: Shift to clean energy may keep power stocks in top league

In 2022, stocks powered through the broader market weaknesses and, the Nifty Energy index was up over 16 percent

Continued growth in domestic power demand, momentum in energy transition, and government policy initiative helped the power sector become one of the best performers in 2022. In the past one year, the BSE Power index has gained more than 13 percent as against the 5 percent rise in the benchmark BSE Sensex.

In 2022, stocks powered through the broader market weaknesses and, the Nifty Energy index was up over 16 percent as compared to the NSE 500 or the NSE 200 which were up around 4.5 percent. In fact on one, three, or five year basis as well, the energy index has outperformed broader NSE 200 or NSE 500 by over 200-500 basis points, highlighted Azeem Ahmad, Head PMS & Principal Officer, LIC MF.

The reason for continued improved has been the insatiable demand for power as the Indian economy navigates through the global headwinds by focusing on domestic consumption and growth. “The power sector was in favour in the last few years because of high dividend yield, low valuations coupled with strong volume growth,” Ahmad explained adding that these tailwinds are likely to continue in 2023 as well.

Within the sector, stocks that are focusing on green energy might continue to grab major attention and price performance, he said.

The year-to-date power demand in India is up 11 percent due to low base and normalisation after Covid-19, IIFL Securities highlighted. Though over the next 12 months, growth should normalise to 5-7 percent on-year, led by states such as Maharashtra, Gujarat, Uttar Pradesh, Tamil Nadu, Rajasthan, it said.

Growth would be supported by an improvement in financial health of State Electricity Boards, analysts said.

A report by BOB Capital Markets said that the total outstanding dues owed by electricity distribution companies (discoms) to power producers nearly halved to Rs 675 billion as of December 2022, compared to Rs 1,210 billion as of December 2021. Substantial reduction in the discoms' total outstanding is mainly due to various steps taken by the government, like implementation of late payment surcharge rules and providing facility of equated monthly installments to utilities, the report said.

With renewable companies being in focus lately due to transition to clean energy, there is an expectation that the upcoming Union Budget might entail some measures or incentives to promote clean energy storage and transmission. BofA Securities even sees capacity addition of nearly three times in multiple infrastructure verticals including power transmission.

Bora expects the upcoming budget to announce key measures for power sector including subsidy scheme to lower cost of green hydrogen, introduction of PLI scheme for electrolysers and promoting investment in renewable energy with lower interest rate for those projects along with an increase budgetary allocation towards PLI scheme for manufacturing of solar module.

Even Sunil Damania, Chief Investment officer, MarketsMojo, is of the view that expect the government will create incentives for new forms of energy or power generation.

Ahmad said that the Budget is likely to address the provision for viability gap funding for battery energy storage systems. This proposal is likely to see light as the same has been at the top of agenda from Power ministry alongside budgetary allocations for green energy lines transmission set up.

Priyankar Biswas of Nomura is also bullish about the prospects in power transmission space.

Transmission ordering was weak for the last five-six years but he now sees an uptick in the ordering activity in the transmission space. Biswas pointed out that many companies are already witnessing order inflows and he expects this trend to continue for some time, at least for the next few years.

India's power consumption grew in double digits in the first nine months of FY23 despite elevated coal price and the same is reflected in strong power generation growth of 11.6 percent YoY for large players like NTPC, said Abhijeet Bora, DVP Research Analyst at Sharekhan by BNP Paribas.

He believes that the outlook for power stocks looks promising as the project pipeline for companies like NTPC and Power Grid remains strong. NTPC has robust commercial capacity addition target of 18 GW over FY23-25, which would drive double-digit growth in its regulated equity base and provides earnings growth visibility while Power Grid has healthy capex plan of Rs 13,000 crore for FY23, works in hand of Rs 45,700 crore, focused to diversify into smart metering and we expect strong 11 percent compounded annual growth in net profit over FY22-25.

Ahmad pointed out that any logical or material progress on reforms in the sector will be transformational and is not yet priced by stocks as they still trade below long term valuation ranges.

Biswas believes margins of these transmission companies might also improve as commodities also start correcting from last year’s levels.